The Social Security Board of Trustees recently released its 2023 report on the financial status of Social Security’s Old Age and Survivors Insurance (OASI) Trust Fund, which pays retirement benefits to about 52 million seniors. Warning that the finances had worsened slightly, news reporters rushed to reassure the public. The OASI Trust Fund still has some $2.7 trillion and won’t be depleted until 2033, only one year earlier than had been projected.
But does the OASI Trust Fund really have $2.7 trillion? Yes, at least on paper. The problem is that Congress has borrowed those surplus funds and spent them. And importantly, it can’t repay the money without borrowing more.
Social Security operates on a pay-as-you-go basis. The FICA (payroll) taxes taken from current workers’ paychecks (6.2 percent from the employee is matched by the employer, for 12.4 percent total) is used to pay current retirees.
When the government collects more in FICA taxes than it pays out, as the OASI Trust Fund did for every year except one from 1984 through 2020, the surplus in the Trust Fund is used to purchase special, interest-bearing U.S. Treasury notes. Congress is then free to spend those funds however it chooses.
Unlike normal U.S. Treasuries, these “specials” cannot be sold on the open market. They are essentially an intergovernmental transfer. Here’s how the Congressional Research Service (CRS) explains it: “Social Security tax revenues are invested in U.S. government securities (special issues) held by the trust funds, and these securities earn interest. The tax revenues exchanged for the U.S. government securities are deposited into the General Fund of the Treasury and are indistinguishable from revenues in the General Fund that come from other sources.”
The CRS reiterates the point later: “If, in any year, revenues are greater than costs, the surplus Social Security revenues in the U.S. Treasury are available for spending by the federal government on other (non-Social Security) spending needs at the time.”
Got that? The money goes into the government’s General Fund, and Congress can spend the money on anything it wants.
But what if Social Security spends more than it collects in a given year?
“If, in any year, costs are greater than revenues, the cash flow deficit is offset by selling some of the accumulated holdings of the trust funds (U.S. government securities) to help pay benefits and administrative expenses,” the CRS reports.
The Social Security trustees estimate in 2023 that the OASI Trust Fund will spend $40 billion more than it takes in. So, the Social Security Administration will have to sell $40 billion of its special securities to pay current retirees.
Now, if the federal government were operating with a surplus in its General Account, then it could just transfer part of those funds to Social Security. But the federal government does not have a surplus. Indeed, the Congressional Budget Office (CBO) projects the federal government will have a deficit of $1.4 trillion this year alone. So, Congress will have to borrow $40 billion to transfer it to the OASI Trust Fund.
In short, while the Social Security Trust Fund has a hefty surplus on paper, Congress has borrowed those funds, and it will have to borrow money plus interest to repay the borrowed money when the OASI needs it.
But wait, hasn’t the federal government reached its borrowing limit? Yes, it has, and it won’t be able to borrow more money until Congress agrees to increase that limit.
Does that mean that until there’s a deal the government won’t be able to pay retirees their benefits?
Probably not. The federal government has revenue coming in all the time, and money is fungible. So, the government would just prioritize those incoming funds to go to Social Security and put off paying other obligations until it can borrow more.
But even these steps would only provide a short-term fix. The Trustees warn us that when the OASI Trust Fund runs out around 2033, incoming payroll tax revenue will be able to cover only about 77 cents of each Social Security dollar owed. Seniors won’t be happy about that.
That’s why President Biden wants to raise the payroll taxes. Of course, raising taxes, instead of cutting other government spending, is his go-to solution to almost every policy challenge.
It would be better to engage in a responsible, bipartisan debate over how to address Social Security’s financial problems. But that probably won’t happen. It’s easier for Biden to demagogue the issue in an effort to enhance his reelection chances.
Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter @MerrillMatthews.